Taxes: A Necessary part of Financial literacy

Updated April 27, 2023

Why do kids need to know about taxes? 

Let this writer be a lesson.  At the age of 16, I was thrilled to start my first job as a lifeguard at a nearby pool and even more excited to earn my first paycheck.  I knew my hourly rate and how much time I had clocked in that week and had mentally calculated what my paystub would come out to.  Without a solid understanding of taxes, I was downright shocked when I saw the final number after my first week of work.  It felt like highway robbery that the government had taken so much of my hard-earned dollars right out of my paycheck, but it was also a powerful first lesson in an unavoidable financial fact of life.  My very vague concept of taxes (at 16!) left me unprepared.  It’s time we arm our kiddos with the tax tools they need so they know what to expect when they earn or spend money. 

Explain What Taxes Are

Taxes are funds that people pay to the government on both money they earn and money they spend.  The government collects taxes from individuals and corporations and uses the money to pay for the services it provides.  Taxes help fund everything from schools, libraries, and hospitals, to roads and bridges, to garbage collection and firefighting. 

It’s important that our littles recognize that there are a few different ways that the government collects taxes from its citizens. 

Different Ways Taxes are Collected

• People pay taxes when they purchase items ranging from food to clothes to furniture. 

• People also pay a portion of their income, or money they earn, to the government as taxes. 

• They pay taxes on property that they own, such as apartments or houses. 

• Businesses pay taxes on their annual profits, or money they make. 

• Finally, whether people earn money through investments, inheritance (money from someone who passed away) or even the lottery...you guessed it, they pay taxes. 

All of these funds have amount to over $2 trillion in the fiscal year to date 2023 and pay for many of the services the U.S. government provides to its people. 

Some taxes are paid to local governments, some are collected by state governments and some go to the federal government to fund all of their services.  It’s a complicated system, for sure.  If kids can get a grip on three of the most basic forms of taxes, income tax, sales tax and property tax, they are already one step ahead of the game.  Are they ready for a slightly deeper dive? Read on for the basics on The Big Three.  

Three Types of Taxes

1. Income Tax

Income tax is money people pay the government out of their paychecks. People pay taxes on their earned income, or money they make through their jobs, and their unearned income, or money from their investments (also called capital gains).

In the United States, we pay income tax as a progressive tax, meaning people who earn more money pay more taxes than those who earn less. A progressive tax attempts to make society more equitable by taxing wealthier people more and spending it on services to help the poor. (A regressive tax, however, is when everyone is taxed the same amount, which means the tax rate decreases as people earn more.) Most people have to pay their income tax by Tax Day, which is typically April 15th.

There is a whole government agency called the Internal Revenue Service (IRS) that is dedicated to collecting taxes and checking to make sure everyone has paid the right amount. If people fail to pay their taxes, they usually have to pay a fine or can even go to jail!

2. Sales Tax

Sales tax is extra money people pay on things that they buy. Sales tax rates vary from state to state and can climb as high as 9.55% (looking at you, Tennessee!), while five states charge no sales tax at all (Alaska, Delaware, Montana, New Hampshire and Oregon).

Sales tax makes purchases more expensive, as it adds an additional percentage to goods or services people buy. Individuals pay sales tax on everything from a gallon of milk to a haircut, though items deemed to be harmful to society like alcohol, soda or cigarettes are taxed at a higher rate (sin tax) to discourage people from buying them.

3. Property Tax

Property tax is a tax people pay on real estate they own, such as homes or apartments, and is usually based on the location and value of the property. Funds from property taxes typically go to local governments to pay for schools, road repairs and police or fire departments.

Want a Sweet Way to Teach Your Child About Taxes?

Check out our guide on candy tax for a fun way to teach your child about taxes

Benji’s Bottom Line

As our main man Ben Franklin said, “In this world nothing can be said to be certain, except death and taxes.” While these might not be choice words for our kindergarteners, there is no doubt that parents need to prep our littles with some basic knowledge about this financial fact of life. By looking at sales tax on a receipt for a new pair of sneakers, showing income tax on a sample paycheck or pointing out how our property taxes help pay for local services, parents can take the taboo out of taxes and give their kids a jump start on their financial

Do you think it’s fair to tax wealthier people at a higher rate? Or do you think everyone should pay the same percentage of their income in taxes?

Have you ever gone to purchase something with your Spend dollars and come up short because of the sales tax? Find out what the sales tax is in your state and town.

What activities/services do you benefit from that are funded by your family’s property taxes?